Born 25 November 1835 in Dunfermline, Scotland. His father,
William Carnegie was a master handloom weaver like his father and grandfather
before him. He was a weaver who made fine damask linen with elaborate designs.
{Aside – damask linen means a linen fabric with a woven design. Linen
thread comes from the fiber of the Flax plant.} By 1835 the invention of the
Cotton Gin in 1793 – which made cotton cheap and a readily available alternative
to both linen and wool -- and the development of power looms meant that the
days of the master handloom weaver were numbered. Carnegie’s mother,
Margaret, was frugal, neat, hard-working, with a strong and determined personality.
Emotionally, she was a stronger person than her husband, William.

Andrew Carnegie did not go to school until the age of 8. Indulged by
his parents, they had foolishly told him that he did not have to go to school until
he decided to do so. At age 8 the local schoolmaster persuaded Andrew that
schooling was a good thing. By the time the Carnegie family emigrated to America
in 1848 Andrew had had only 5 years of formal education (and this in a classroom
with up to 180 children in it!). He could read, write, perform basic arithmetic,
and knew a little Latin and a few poems.

By Andrew’s birth in 1835 there were already over 100,000 power looms
in the British cotton textile industry and the technology was rapidly spreading to
the other textiles. The amount of work done by the hand weavers slowly declined
until nearly all were out of work by the mid 1840s. Carnegie’s family had to move
to a smaller house and his Mother began running a little shop in the house where she
sold food and sewed shoes on consignment in the evenings. Finally, in 1847 a large
steam power weaving factory opened in Dunfermline ending for good the handloom
weaving business. This, coupled with the potato blight, only worsened conditions
in Scotland.

Margaret Carnegie decided during the winter of 1847 that the family must
migrate to America. Two of her sisters had migrated to Pennsylvania in 1840 and,
after writing discouraging letters for several years, began encouraging the Carnegie
family to migrate. They sold all their possessions (the loom at a considerable
loss as it was no longer valuable) and with a loan from a friend of Margaret’s,
sailed for New York City from Glasgow on 17 May 1848. From New York City, the
Carnegie family went by boat up the Hudson river to the Erie Canal, traveled up
the canal to Buffalo, by lake steamer to Cleveland, down the Ohio canal to the
Ohio River, down the Ohio River to Beaver, PA, and finally by steamboat from Beaver
to Pittsburgh. They settled in Allegheny, PA (now part of Pittsburgh’s "north
side").

Early Business Career: 1848-1852

At the age of 13 Carnegie went to work as a bobbin boy in a local
textile mill owned by a fellow Scot. He made $1.20 a week. Shortly thereafter
he got a better paying job in a bobbin factory of yet another expatriate Scot.
His job was dipping the bobbins into an oil bath and firing the factory boiler.
He also got to work in the Company office on occasion where he decided he needed
to learn double-entry bookkeeping. Consequently, in addition to working 12 hour
days, he went to night school across the river in Pittsburgh.

Carnegie’s big break came in 1849 when he got a job at the O’Reilly
Telegraph Company as a messenger boy (his Uncle knew the owner, yet another
expatriate Scot). {Aside – Carnegie’s experience was fairly typical. The
more daring emigrated to America first. They would send letters home recounting
their experiences. The more timid would then emigrate and rely upon the informal
networks of fellow countrymen – Scots, Irish, German, etc. – for help in finding
housing and work. The consequence was ethnic concentration – especially in the
eastern cities.} Carnegie delivered messages to all the important businesses
in the city and soon knew a great deal about Pittsburgh’s commercial affairs. He
also came to appreciate the importance of the telegraph to the new economy that
was then emerging. He worked long hours and learned telegraphy on his own time.
In 1851 he became a full time telegraph operator and picked up the talent
of being able to read a message in his head. {Aside – The early telegraph used
the opening and closing of "relays" to send the Morse Code – all you
heard were these "clacks" the spacing of which determined whether it was
a dot or dash.}

The Pennsylvania Railroad: 1852-1865

Carnegie’s big break in life came at the age of 17 when Tom Scott
of the Pennsylvania Railroad hired him. Carnegie had come to Scott’s attention
because of his reputation as being the best telegraph operator in town and Scott
needed a personal telegrapher and secretary.

Thomas A. Scott (1823 - 1881)

Scott had just been placed in charge of the Pittsburgh division of the
Pennsylvania Railroad. The Pennsylvania, arguably the best managed railroad in the
country ("the standard railroad of the world"), was at that time applying
telegraph control – pioneered by Daniel McCallum of the Erie – to the movement of
trains. (This was particularly important for the Pennsylvania given that it was a
mountain railroad and had to run numerous smaller trains.) Carnegie soon became
Scott’s right hand man and was awarded with greater and greater responsibilities.
One day he even issued orders using Scott’s name to get traffic on the railroad
moving again after a derailment. In 1855 while on a 10 day trip Scott even left the
20 year old Carnegie in charge of the Division.

Pittsburgh Division Pennsylvania Railroad

Carnegie happened to come onto the scene just as J. Edgar Thomson was
perfecting a cost accounting system for the railroad based on highly detailed
statistics. Implementing this system was Scott’s job who was promoted to General
Superintendent in 1855. Scott took Carnegie to the Altoona headquarters where
Carnegie helped Scott perfect the system.

John Edgar Thomson (1808 - 1874)

In 1859 Carnegie was appointed Superintendent of the Pittsburgh
Division at the age of 24! This was the most important and difficult
Division of the railroad and Carnegie did an outstanding job. Indeed, Carnegie
was so good that if he had chosen to make a career of it he would have been an
important Railroad President in his own right. Carnegie showed his abilities by
perfecting the system of statistical control even further and introducing management
innovations. He ordered the telegraph stations be kept open 24 hours a day and
appointed night time dispatchers thereby greatly increasing the efficiency of 24
hour movements of traffic. To clear away wrecks more quickly he ordered the cars
blocking the track to be burned and he even had temporary tracks laid around wrecks
to put the railroad back in service more quickly.

At the beginning of the Civil War in 1861 he helped Scott open the
railways into the Capital. He also helped organize the Telegraphers Corps for the
Union Army.

Summary:

Some of the qualities that were to mark his later career had
emerged by 1865.

1) Hard working (at least when he was young – this would change by the 1870s)

2) ability to master the details of a business very quickly

3) daring and forceful – not afraid to make decisions and follow through.

Financier: 1863-1872

In 1856 Scott persuaded Carnegie to buy some stock and even loaned him
the money to do so. Carnegie bought the stock primarily because he admired Scott
and regarded him as a father figure. The experience of receiving dividends changed
Carnegie’s attitude and he became an enthusiastic investor.

Carnegie’s investments were primarily with Scott and Thomson and were in
firms that did business with the Pennsylvania railroad. At this time business
practices which today would be unethical and illegal were quite common. In
particular, they often invested in firms that they could then contract with – in
their roles as managers of the Pennsylvania railroad – to do business with the
railroad. For example, they invested in a sleeping car company and then contracted
with the company to run its sleeping cars over Pennsylvania track. Often these
investments required little up-front cash because the subscription could be paid
off by the dividends.

In 1861 Carnegie and William Coleman – a wealthy Pittsburgh iron maker –
founded the Columbia Oil Company to get in on the oil drilling boom in the Oil
Regions north of Pittsburgh. They made a substantial amount of money but Carnegie
grew tired of the messy and chaotic state of the oil business and sold out in
1865.

In 1862 Carnegie, Scott, and Thomson and a number of other Pennyslvania
Railroad managers started the Keystone Bridge Company. Carnegie had been
convinced that the trend in railroading was towards heavier locomotives and cars
and longer trains in order to increase productivity (this is also why he got into
steel railroad rail manufacturing a few years later). Consequently, the wooden
bridges used by railroads, in addition to being a fire hazard, would eventually
have to be replaced by sturdier, iron and steel bridges. Not surprisingly, the
Pennsylvania Railroad could be counted upon to turn to the Keystone Bridge Company
for its iron bridges.

Carnegie quit the Pennsylvania Railroad in 1865 both to concentrate on
the bridge business which he was confident would boom after the War (the
transcontinentals and rebuilding the railroads in the South) and to pursue
investments. Keystone landed several major contracts to build bridges across
the Mississippi and Missouri Rivers. Typically, major bridges were built by
independent companies that floated stock to pay for the construction and then the
bridge itself would be leased to a railroad. In addition, sometimes the bridge
company contracted with a separate construction company to actually build the
bridge. This opened even more avenues for profitability in securities transactions
as the construction company usually was paid in stock at an inflated rate. This
paved the way for multiple commissions for Carnegie in his role as securities
salesman.

In 1867 Carnegie moved from Pittsburgh to New York City and began
travelling regularly to Europe to sell bonds. By 1869 Carnegie and his perennial
partners Scott and Thomson had made small fortunes by starting up their own
telegraph company (which conveniently used the PARR right-of-way and had contracts
with the PARR) which Carnegie was later able to quietly sell at a big profit. The
trio also made an alliance with Pullman to provide the Union Pacific Railroad with
sleeping cars. In 1871 the same group arranged a $600,000 loan to the Union Pacific
in exchange for UP stock. The stock promptly rose because investors thought
Thomson – who ran "the standard railroad of the world" – would take over
the UP management. Instead, Carnegie began selling their "cheap" UP stock
at a substantial profit.

In 1869 Carnegie met Junius Morgan (J. P. Morgan’s father) in London.
Junius Morgan was one of the leading investment bankers in London and his
word "was as good as gold". If Morgan endorsed a bond issue, it would
be easily placed. Carnegie made substantial fees (typically 2.5%) selling bonds
in Europe. He placed issues for various bridge construction projects and several
railroads. By 1872 he was a rich man.

Iron: 1861 - 1872

Carnegie had gone into the iron business as early as 1861 when he and
Thomas Miller had made an investment in a local iron company. Carnegie and Miller
and two other partners later founded the Cyclops Iron Works in Pittsburgh in October
of 1864. This firm was later merged with another firm in 1865 to form the Union
Iron Works. After buying Miller out (at Miller’s request), Carnegie’s partners
were his brother Tom, Henry Phipps, and Andrew and Anthony Kloman.

Henry Phipps (1839 - 1930)

Carnegie’s aim was to ensure his Keystone Bridge Company a reliable and
cheap supply of iron beams and plates -- in short, vertical integration.
This was something new in the iron business. Before Carnegie the business was
highly specialized – one mill produced the pig iron; another converted the pig
iron to bars and slabs; other mills then rolled railroad iron, manufactured plates,
nails, and so on. Transferring the iron from one establishment to another
significantly slowed down the production of finished goods and added to the costs
because of all the middlemen. His training on the Pennsylvania railroad was
crucial. With the high fixed costs of railroading, to make money it was essential
to: 1) have a good cost accounting system; and 2) once the costs were known, speed
the flow of traffic through the system and increase its volume. His great
innovation was applying these principles to the iron and steel
business.

After some initial resistance, Carnegie was able to impose a rigorous
cost accounting system which including installing weighing scales at all points in
the mills to see where material was saved or not saved, and every man in a
particular job was compared with all other men in that job. Cost accounting was
the most important factor thereafter in personnel, marketing, and investment
decisions.

In terms of speeding up the flow and increasing the volume, combining
the production of iron beams and plates with the bridge company, he drastically cut
the time and labor required to move material from operation to operation.

When Carnegie felt that he had successfully blended the two businesses
he moved to expand further. In 1870 he built his own blast furnace (called
the "Lucy" after Tom Carnegie’s wife) to guarantee supplies of pig iron
that he controlled. The furnace went into blast in 1872 and Carnegie was determined
to increase its efficiency. He was amazed when he first went into the iron business
that the owners of blast furnaces knew very little about what went on inside the
furnace. It was literally a "seat-of-the pants"
"rule-of-thumb" operation.

Now that he owned his own blast furnace Carnegie hired a German chemist
to find out what was going on within the furnace. His chemist was able to tell him
how good his iron ore was and how to improve the charge in the furnace. Andrew
Kloman figured out a way to remove the slag from the furnace more rapidly thereby
increasing the output. With the cost accounting system, Carnegie and his
associates soon realized that they could hard drive the furnace.
Hard Driving (increasing the flow of hot air through the bottom of the
furnace at high pressure) wore out the furnace lining very rapidly, but the
increased output more than justified the relining costs and the reduced life of
the furnace. Indeed, Peter Berck ("Hard Driving and Efficiency: Iron
Production in 1890") shows that in 1890 "the pure profits of a hard-driven
furnace would be enough to pay for the furnace in two years!" An American
style hard driven furnace had to be relined every 3 years as opposed to 12 years
for a British style furnace. Even with the cheaper capital available in Britain,
the increased output of an American style hard driven furnace produced capital
savings if output exceeded the (low) figure of 45,000 tons a year. Carnegie’s men
eventually got the Lucy to produce 100,000 tons a year!

Cost Analysis Harddriven Furnace: Berck, Table 1

Steel: 1873-1892

In 1872 Carnegie came back from a trip to England convinced that the
future was steel. Because of his experience on the Pennsylvania railroad, Carnegie
was convinced beyond any shadow of doubt that the American railroad system had
to switch to steel rails as soon as they were cheaply available. The
difference in strength and longevity was on the order of a factor of 15 to 20.
The productivity gains to be had were so great that it was simply a matter of time
before the railroads switched over.

Indeed, as early as 1865 Carnegie had experimented with variety of
hybrid iron-steel rails but all these experiments failed. In 1866 the rival
claimants to the Bessemer steel process had compromised their differences thereby
making the patents available for licensing in the U.S. The Bessemer process
successfully burned out the silicon and the carbon from the pig iron – thereby
making the cheap production of steel practical – but it did not burn out the
phosphorus. Consequently, for the process to work, iron ore very low in phosphorus
had to be used.

Bessemer Converter

The Bessemer Volcano

Such high quality iron ore lay in abundance in the Upper Peninsula of
Michigan. It was discovered in 1845 and its exploitation made possible with the
construction of the canal at Sault Ste. Marie in 1855. However, it was not until
1868 that the ore was tested for its phosphorus content and its usefulness in the
Bessemer steel process determined. And it was not until 1870-71 that the
transportation facilities were good enough to funnel large quantities of the ore
down to the lower Great Lakes.

Given all these facts, it is not surprising that during his tour of the
Bessemer plants in England during 1872 Carnegie determined that simply expanding his
existing iron mills was too limited a venture. He decided he had to build a brand
new, large plant devoted solely to making Bessemer steel railroad rails. This was
to be The Edgar Thomson Works.

Henry Phipps and Tom Carnegie declined at first to participate in Andrew
Carnegie’s "daring" new venture and Carnegie was forced to set up a
separate partnership to build the new works. He was able to persuade a number of
influential Pittsburgh businessmen to participate and he put up $250,000 of the
total $700,000 capitalization of the venture himself and his old partners from Union
Iron -- Phipps, Tom Carnegie, and Kloman each chipped in $50,000 apiece. His old
allies Tom Scott and J. Edgar Thomson also came in for small amounts via Carnegie’s
share. Land was acquired at the site of Braddocks’ field on the Monongahela River.
(This was the battlefield where the British General Braddock was defeated and killed
during the French-Indian War. One of his officers, Col. George Washington, led the
retreat taking the troops to the south towards Maryland.) The location was ideal
because it was near two railroads – the B&O and the Pennsylvania – and it was
near the Youghiogheny River which ran through the nearby coal regions.

To supervise the construction Carnegie hired Alexander L. Holley who had
a contract with Bessemer for the exclusive use of his process in America. Holley
already had built several Bessemer plants and had made considerable improvements in
the process. Carnegie paid only $11,000 in patent fees and a $5000 fee to Bessemer
(and a $2,500 per year salary) to construct the works.

Shortly after construction was started the financial Panic of 1873 began
that September and the country was plunged into depression. Some of his partners
were unable to come up with their shares in the project and Carnegie himself was
pressured by Tom Scott to help bail him out of his problems with the Texas &
Pacific Railroad. Carnegie wisely refused, Scott went bankrupt, and their
friendship ended. To keep the enterprise afloat Carnegie took Holley with him to
London in the summer of 1874 and the two were, with the aid of Junius Morgan, able
to sell $400,000 worth of bonds to London investors.

The Edgar Thomson works were completed in 1875 and the business was an
immediate success. Carnegie was very fortunate that Holley recruited Captain
William Jones from the Cambria Iron Works in Johnston to help run the new mill as
the superintendent at the beginning of the project. Jones in turn recruited many
talented men and it was Jones and his Lieutenants that made the works such a
smashing success.

Captain William R. Jones (1839 - 1889)

Jones had worked closely with Holley and was an expert iron and
Bessemer steel man. He introduced many improvements in the mill and was a
fiercely competitive man. He enjoyed a challenge and his personality meshed
perfectly with Carnegie’s obsession with costs and the speed of production.
Jones was a mechanical genius and made numerous improvements to the mill. He
invented many important processes and devices to speed the flow of the metal
through the various stages of the production process before it cooled. This
resulted in huge savings and increased output because the metal did not have
to be re-heated at the various stages of processing.

For example, he invented the Jones mixer, a giant "tea
kettle like" box that could hold up to 150 tons of molten pig iron fresh
from the blast furnace and later transfer it to the Bessemer converter. He
also shared Carnegie’s basic philosophy of always using the best tools for the
purpose at hand and even if a tool or machine was not worn out it was to be
discarded in favor of a better one if that was cost efficient. Finally, the
workers in the plant respected Jones and he often argued for their interests
when he felt that Carnegie made unrealistic demands for reductions in labor
costs. Nevertheless, Jones worked his men hard – 12 hour days seven days a
week with only the 4th of July off.

Because Carnegie always had majority control in the partnership,
he insisted upon plowing almost all the profits back into improving the
works – always upgrading, always in search of the littlest efficiencies.
He was always concerned more with building and improving than spending
dividends. Carnegie liked to promote from within. If he found a particularly
outstanding young man in his works he would offer to make him a partner
(at a fraction of 1% but that was still worth a lot of money). The other
side of the coin was Carnegie’s ruthlessness when it came to partners he felt
were no longer performing to his standards. Those men were forced out of the
partnership and by the "iron-clad" partnership agreement they had
to cash in their shares at the "book" value. Since the partnership
was grossly undervalued this meant that the man forced out would walk away
with a fraction of the true value of his share of the firm.

Carnegie became the chief salesman. Here his experiences working
on the Pennsylvania railroad and selling bonds meshed perfectly. He knew
most of the railroad leaders in the United States and worked in his usual
tireless fashion to sell them his Bessemer steel rails. As a consequence,
the output of the Edgar Thomson Works steadily rose from 21,674 tons in 1875
to 536,838 tons in 1889. During the same period his costs fell from $58 to
$25 a ton with the profits rising accordingly.

Charles M. Schwab (1862 - 1939)

In October 1883 Carnegie bought the Homestead Works
from a group of Pittsburgh investors. It was a highly efficient steel rail
works but it had been plagued with labor troubles for some years. Carnegie
expanded the plant and installed large new open hearth furnaces and by 1885
converted Homestead to rolling beams and angles in order to diversify his
products. In 1886 Carnegie – on Jones’ recommendation – made Charles
Schwab (at the age of 24) general superintendent of the Homestead
Works.

Producting Steel Rails c. 1940

In October 1886 Thomas Carnegie died of alcoholism. Tom
Carnegie was an unhappy man who had lived his whole life in Andrew’s shadow
"minding the store" for his great brother. By this time Andrew
Carnegie was traveling for pleasure and taking long vacations. In addition
he was engaged to be married and finally did marry the next year. He relied
on the cost sheets that were provided to him no matter where he was to oversee
his holdings. However, the sheer size and complexity of the business meant
that he had to have high quality managers at each of his works and he
increasingly felt the need to have a single top manager to oversee all the
mills. He solved his problem temporarily by making Henry Phipps the head of
Carnegie Brothers Company (which was separate from Carnegie, Phipps Company,
Limited) and by bringing Henry Clay Frick into the partnership.

Henry Clay Frick (1849 - 1919)

Carnegie had purchased an interest in Frick’s Coke company in 1881
and by 1883 Carnegie Brothers controlled a majority of the Frick Coke Company
stock. Carnegie wanted to ensure himself a guaranteed supply of high quality
coke and did so by his usual route – vertical integration. The Frick
coke was from the Connelsville region southeast of Pittsburgh and was of
unusually high quality. (Connelsville coal was high grade, soft, and easily
worked. It was very low in ash and sulfur and when it was turned into coke it
was a fine, hard, dense fuel.) Carnegie admired Frick’s abilities and after
1886 he needed Frick’s help with the management of his vast steel
interests.

Frick became head of Carnegie Brothers in January 1889 after
an initial falling out with Carnegie over the handling of a strike in the Coke
fields in 1887. Frick eventually was coaxed back into the active management
and with Henry Phipps’ request to withdraw from active management and the
death of David Stewart – Phipps successor – the way was cleared for Frick.
Frick was an immediate and huge success. Profits rose from $2 million in 1888
to $3.5 million in 1889 to $5.4 million in 1890.

In November 1890 Frick was able to buy the Allegheny
Bessemer Steel Company located in Duquesne south of the Edgar Thomson
Works. The Duquesne Works were superior to the Carnegie mills in that the
ingots were rolled into finished steel railroad rails with no reheating. The
Carnegie people had disparaged the process implying that it produced defective
rails. After gaining control of the works, a careful cost analysis persuaded
Carnegie, Frick, and all the top managers that the Duquesne direct rolling
process was indeed superior to the method they were using. Accordingly, they
converted both the Edgar Thomson Works and the Homestead Works to direct
rolling.

In 1892 Frick persuaded Carnegie to merge Carnegie Brothers
and Carnegie, Phipps, Company into one vast company – Carnegie Steel.
It was formed on 1 July 1892 with a capitalization of $25,000,000 which
was far below the actual value of the company. Carnegie owned 55%, Frick 11%,
Phipps 11%, and nineteen other partners 1% each. The remaining 4% was held in
reserve to reward successful young men in the plants.

The Homestead Strike of 1892

The same day that Carnegie Steel came into existence – 1 July 1892
– the strike began at Homestead. Labor trouble at Homestead was nothing new.
Indeed, the previous owners of the Works sold out to Carngie in 1883 because
they had grown tired of dealing with labor problems at the Works. The
transfer of Homestead to Carnegie, Phipps, & Co. did not end the labor
problems. A strike in July of 1889 was settled by William Abbott – vice
chairman of the company – on terms favorable to the union – the Amalgamated
Association of Iron and Steel Workers (organized in 1876). In exchange for
recognizing the union as the sole negotiating agent for Homestead, the union
accepted the company’s wage offer. Wages were linked to the price of
billets (a slab of iron/steel) with a minimum wage below which the
workers’ wages could not fall. If the price of billets rose, wages rose,
and vice versa. Carnegie and Frick did not appreciate Abbott’s actions –
Carnegie thought Abbott had surrendered to violence – and Abbott retired in
1892.

To Carnegie and Frick labor was just another input – like iron ore,
limestone, coke, etc. – to the steel making process. As such, they were just
as concerned with holding down and controlling labor costs as they were with
any other cost. And like any other input, they wanted to increase the
productivity of labor. This was done by introducing machinery and reducing
the number of men in the Works as well as increasing the speed
of labor. Hard Driving the furnaces wore out the linings and the
men faster but increased the output of steel and the resulting
profits.

Carnegie and Frick agreed upon a two-point plan before Carnegie
sailed to Scotland in April of 1892. First, the floor of the sliding wage
scale would be lowered from $25 to $22; and second, Carnegie Steel would no
longer recognize the Amalgamated as the bargaining agent. Homestead was the
only Carnegie plant that was unionized and Carnegie and Frick were determined
that, henceforth, all of the Carnegie mills would be non-union.

The Amalgamated represented only 800 of the 3800 employees at
Homestead. The union had originally been based upon skill and the ordinary
laborers – the Slavs, Italians, and Hungarians – were not welcomed to the
ranks. These men at the bottom of the heap worked 12 hours a day seven days
a week or more in appalling conditions. Death and injury rates were very high
and the pay was 15 cents or less an hour. But the laborers supported the
Amalgamated in the strike because the union was not "the company"
and at least the Amalgamated treated them like men and not cogs in the
steel-making machine.

Carnegie felt that the right way to deal with a strike was simply
to shut the Works down and wait out the strikers. He had used this tactic
successfully in 1888 at the Edgar Thomson Works and recommended it to Frick
before his departure in April of 1892. However, Carnegie and his partners
seemed to have been in agreement that Frick was to handle the situation and
Carnegie – quite uncharacteristically of his usual style – went into seclusion
in Scotland where he could not be reached. Harold Livesay puts it well:
"He pulled the covers over his head to shut out the sounds of conflict,
hoping that when he pulled them off, all would be well, his own reputation as
the workers’ friend preserved by his absence, and blame (if any) attached to
Frick."

In any event, Frick emerged victorious but at a very high personal
price both for himself and Carnegie. He broke the Amalgamated and the men
were eventually forced to sign individual labor contracts in order to return
to work. The beating of the Pinkertons after their surrender and the
attempted assassination of Frick had turned public opinion temporarily against
the strikers but it permanently damaged Carnegie’s reputation.

The Homestead strike was just one of many violent confrontations
that took place between management and labor until the rights of labor to
unionize and collectively bargain were finally and fully legalized by the
Wagner Act (National Labor Relations Act) of 1935. What Carnegie and Frick
did not understand was that the industrial economy with its mass production
had changed the nature of the relationship between employer and employee.
For the men who worked in the mills 72 hours a week the job was
their life. Their wives and children depended upon their labor. Without
expressing it exactly in those terms, they workers felt that they had property
rights in the mills. They did not own the mills, but by living most of
their waking lives there and being responsible for running the machines that
produced so much wealth, they felt that they had earned the right to a
bigger share of the pie. They were not Socialists, they did not want the
owner’s mill, rather, they wanted property and freedom of their own in the
form of more control over their working conditions and wages. They were
fighting for dignity and a better life, not for a "Worker’s
Revolution".

Carnegie Exits: 1892-1901

The Homestead strike temporarily sidetracked Carnegie’s
inclinations to retire from business. His last decade in business was in
many respects his finest.

Carnegie’s first challenge was the financial panic of 1893 that
led to a Depression that did not end until 1896. Carnegie responded in his
characteristic way. Cut costs, meet any price, run the mills full. Most of
the mills were totally rebuilt between 1893 and 1898. At Duquesne new, much
larger blast furnaces were installed with automatic loading machines so
efficient that the furnaces set production records and lowered labor costs
50 percent. Schwab, who took over as President in 1897, installed 16 new
furnaces at Homestead and increased the efficiency of the plant to such an
extent that costs fell 34 percent in one year.

Before Frick stepped down as President in December of 1894 (he
become Chairman of the Board in January 1895), he had begun acquiring rights
in the Mesabi range of Minnesota. Frick’s judgement on the Mesabi iron ore
had been better than Carnegie’s who had initially resisted making any
investments. John D. Rockefeller had had no such hesitation. During the
Depression years of 1893 and 1894 he acquired huge holdings, built a railroad
to the Lake, and built a large fleet of huge ore carrying lake steamers to
transport the ore. Carnegie and Rockefeller negotiated a deal in 1896 whereby
Carnegie Steel leased the Rockefeller ore properties for 50 years and agreed
to ship at least 1,200,000 tons of ore annually over Rockefeller’s railroad
and ore boats. This deal assured Carnegie of virtually an unlimited supply
of cheap, high quality iron ore.

Determined to control the transportation of the ore down from Lake
Erie, Carnegie acquired the Pittsburgh, Shenango, and Lake Erie Railroad that
ran from Conneaut, Ohio, on Lake Erie, to Butler, Pennsylania, just north of
Pittsburgh. The railroad was upgraded and rebuilt. Renamed the Pittsburgh,
Bessemer, and Lake Erie, it was extended down to the Edgar Thomson Works
where it was connected with the Union Railroad. (Frick had built the
Union Railroad to connect all the Carnegie mills so that the Company had total
control over all its internal traffic. The 100 miles of track handed
16,000,000 tons of traffic in 1899 that was equal to the combined volume of
the Northern Pacific, Union Pacific, and Missouri Pacific railroads!)

By 1900 Carnegie Steel was an industrial colossus. It was
vertically integrated controlling its own ore, coke, limestone, and shipping
facilities on the Great Lakes and from the Great Lakes to Pittsburgh. Under
Schwab’s leadership it had adapted to the changing steel market by opening
permanent sales offices in major cities where so much steel was being used to
construct new office buildings. Profits climbed steadily from $6 million in
1896 to $21 million in 1899 to $40 million in 1900 after the H.C. Frick
Company was combined with Carnegie Steel.

Carnegie had long wanted to sell out and Phipps and Frick were even
more anxious to do so. The problem that the partners besides Carnegie faced
was the "Iron Clad" (ironically enough it had been devised by Phipps)
and the undervaluation of the stock. In 1899 the firm’s book capital value
was $50,000,000 which was only about 20% of what Phipps and Frick estimated
its true value to be ($250,000,000). If Phipps wanted out he would have to
sell his 11% to Carnegie and the others for a mere $5.5 million. In 1899
Phipps and Frick tried to arrange the financing to sell Carnegie Steel and
Frick Coke for combined total of $320,000,000. They failed and Carnegie
pocketed the $2,000,000 option that they had put up from their personal
funds.

This plus a number of other incidents brought an open break between
Frick and Carnegie in January 1900. Carnegie tried to force Frick out
"at the book" but Frick brought a lawsuit in Allegheny County
Court to stop it. Cooler heads eventually prevailed and a peace treaty was
signed in March 1900. Carnegie Steel and Frick Coke were combined and
capitalized at $320,000,000. Carnegie’s share was $174,529,000, Frick’s
worked out to $31, 284,000, and Frick was ousted from the management.

Carnegie now turned his energies on the competition. He and Schwab
planned to build a huge steel tube plant at Conneaut. He was determined to
enter into manufacture of nails, wire, tubes, hoops and anything else made of
steel with brand new, integrated plants. As the coup de grace, he began
planning the construction of his own railroad due south from Pittsburgh to
West Virginia, then due east through Maryland to the Atlantic Ocean to settle
with the Pennsylvania Railroad once and for all. Like Don Corelone, he was
going to finish off all his rivals at one fell swoop.

The panic of his competitors and his own desire to finally retire
produced the famous handwritten sales offer of $480,000,000 to J. P. Morgan
and the formation of U.S. Steel in March 1901.

When Carnegie died in August 1919 he had given away nearly
$325,000,000.

Summary:

Business Style:

1) Hard working (when he was young)

2) ability to master the details of a business very quickly

3) daring and forceful – not afraid to make decisions and follow through

4) ability to pick gifted associates who reflected his style of
management.

Was Carnegie a Schumpeteran entrepreneur? Yes. He clearly
changed "the stream of the allocation of resources over time by
introducing new departures into the flow of economic life" by
creatingthe modern steel industry. His training on the
Pennsylvania railroad was crucial. With the high fixed costs of railroading,
to make money it was essential to: 1) have a good cost accounting system;
and 2) once the costs were known, speed the flow of traffic through the system
and increase its volume. His great innovation was applying these
principles to the iron and steel business. Like Rockefeller, he used
modern chemistry to improve his products and increase productivity. He set
the standard and forced the entire iron and steel industry to adopt his
methods to the long run betterment of the entire American economy. Cheap
steel greatly increased the productivity of railroads and many other
industries. This was his great accomplishment. Finally, the breadth and
the usefulness of his benefactions continue to honor his name almost 80 years
after his death.